Do fees matter? Investor’s sensitivity to active management fees

Following the framework established by Berk and Green (2004), mutual fund inflows and fees should be uncorrelated at equilibrium. We empirically explore this relationship by investigating the temporal changes in fund fees and flows. Our fee metrics focus on active management services rather than diversification. We analyze the additional fee compared to passive alternatives and additional fee per unit of active management, along with the traditionally used total fee. Our analysis of global data reveals a negative time series correlation between both measures of active management fee and fund flows. • Fees are important for the value creation of active management. • We examine whether active fund flows are sensitive to changes in fees. • We find that changes in total fees are not essential for fund flows. • More important are excess and active fee (excess divided by active share). • Investors are more sensitive to active fees in countries with many index funds.